Wal-Mart talks big

The world’s largest retailer challenges Amazon for online retail leadership. It has a long way to go.

Stores made Wal-Mart great. But those stores may be the biggest obstacle to the world’s largest retailer achieving its stated goal of becoming the No. 1 online merchant.

That’s because strategies that could boost sales at Walmart.com may conflict with what has always been the goal of Wal-Mart Stores Inc.: to get as many consumers into large Wal-Mart stores and sell them as wide an array of products as possible, observers say.

For instance, while Amazon.com Inc. has recruited thousands of merchants to sell on Amazon.com, and shows the lowest-priced product on the site, even if an outside merchant’s price is cheaper than Amazon’s, that collides with the way Wal-Mart and other retail chains have built their businesses, says James Mitchell, an analyst who follows e-commerce stocks at investment bank Goldman Sachs.

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“The offline business model is all about driving footfall into your store and selling as much to them as you can,” Mitchell says. “Wal-Mart matching Amazon in terms of being a relatively neutral marketplace for third-party products will conflict with Wal-Mart’s DNA.”

Wal-Mart executives, for their part, see the situation in reverse, arguing that they can employ Walmart.com together with the 4,200 Wal-Mart and Sam’s Club stores in the U.S. to offer consumers convenience they can’t get from an online-only retailer. They’re emphasizing cross-channel web-and-store initiatives, a strategy that dovetails with the company’s drive to break into urban markets that have largely been closed to Wal-Mart because of political opposition. Big-city stores will have smaller footprints, and Wal-Mart plans to use access to Walmart.com to expand the assortment in those stores.

Wal-Mart and the web

While stores clearly remain Wal-Mart’s top priority, executives are aggressively talking up Walmart.com, which ranked 13th in U.S. online sales in 2008.

“Walmart.com’s goal is to be the most visited and valued online retail site,” Walmart.com CEO Raul Vazquez says. “If there’s going to be a Wal-Mart of the web, it’s going to be Walmart.com.”

Today the Wal-Mart of the web is Amazon-whose web sales were more than 10 times those of Walmart.com in 2008-and Vazquez’s comment, which he’s repeated in several interviews, is just one instance of Wal-Mart executives alluding to the competition with Amazon. In another example, vice chairman Eduardo Castro-Wright told analysts last fall, “I’m happy to report our online business is growing faster than the leading competitor based on that competitor’s quarterly release.”

While Amazon has a big lead online, Wal-Mart’s total sales of $401 billion in its last fiscal year give it 20 times the buying power of Amazon. Plus, the retail chain is legendary for its supply chain efficiency and its brand is widely identified with low prices. Wal-Mart’s not sneaking up on e-retailers.

“Any time Wal-Mart, the world’s largest retailer, says they want to get more serious online, it’s definitely a threat,” says Neel Grover, president and CEO of online-only general merchandise retailer Buy.com Inc.

Walmart.com was No. 13 in online sales among North American retailers in 2008, according to the Internet Retailer Top 500 Guide. But it took several steps last fall to move up.

Walmart.com expanded its health and beauty category, introduced 97-cent shipping on consumer electronics products and launched an Amazon-like marketplace, initially allowing three other merchants to sell on the site.

Beefing up

The retail giant also beefed up its social marketing. In October, Wal-Mart established a page on Facebook and by early December had 270,000 fans. It also prominently features a Q&A; Exchange on Walmart.com that has prompted 220,000 posts by Wal-Mart customers, employees and suppliers, says a Walmart.com spokesman.

But in terms of publicity, nothing compared to Walmart.com’s announcement in October that it would sell 10 of the most-anticipated new books for $10, way below their list prices of $25 to $30. That attracted press coverage, and the attention of two key rivals-Amazon.com and Target Corp.

Within hours, both Amazon.com and Target.com matched Wal-Mart’s $10 price. Walmart.com then lowered the price to $9, which Amazon matched, leading Walmart.com to reduce its price again, eventually to $8.98. Walmart.com initiated a second round in the online price war a few weeks later, slashing prices on 10 popular movies that were about to be released on DVD. Again, Amazon.com and Target.com responded.

The to-and-fro led Wall Street analysts to question Amazon executives during a late October meeting about whether price competition was heating up online. “Certainly it is very competitive,” replied chief financial officer Thomas J. Szkutak. “It’s been very competitive since the day we launched.”

While Amazon executives may publicly dismiss Wal-Mart’s challenge, the leading e-retailer is paying close attention to the leading overall retailer, says Eric Best, who left Amazon in 2001 to found Mercent Corp., which helps retailers sell through such online marketplaces as Amazon and eBay. “I’m certain Amazon views Wal-Mart as a long-term threat,” says Best, Mercent’s chairman and CEO.

And Amazon is not just reacting to Wal-Mart’s moves, but going after Wal-Mart customers with new shipping offers such as Subscribe and Save, which offers discounts for consumers who regularly replenish everyday items through Amazon, and a new same-day delivery service in seven major cities, with more to come. “I can imagine Amazon extending this to suburban neighborhoods in time to go after Wal-Mart, Costco and Target shoppers,” Best says.

Head to head

While Amazon sought to appeal to store shoppers, Walmart.com made headway with its fall offensive, says web measurement firm Compete. Although Amazon.com averaged 67 million unique visitors per month for the first 10 months of the year, more than twice the 32 million of Walmart.com, that gap narrowed in the weeks leading up to Thanksgiving, Compete observed.

On Thanksgiving, Walmart.com’s traffic exceeded that of Amazon.com for the first time ever, says Matt Pace, Compete’s director of retail and consumer products. Although Walmart.com offered 50 web-only specials that day, Pace attributes much of the traffic to shoppers checking out the day-after-Thanksgiving specials at Wal-Mart stores.

Still, Pace adds, “The fact they eclipsed Amazon on at least one day speaks volumes about how far Walmart.com has come.” But Compete data on the Monday after Thanksgiving-a day when many consumers shop online-shows how far Walmart.com has yet to go: Amazon’s traffic was nearly double that of Walmart.com on the day increasingly known as Cyber Monday.